Costs push arena bidders to opposite tactics

Inclusion of a “suggestion” for $250 million in public bonds was a surprise in the bid from Seattle Partners (AEG). Oak View Group also had a surprise: An extra $200 million to excavate a deeper hole for its plan.

The east-west cross-section of Oak View Group’s proposed remake of KeyArena, including a floor 15 feet deeper that the current one. / Oak View Group

The difficulty of shoehorning a world-class sports and concert venue under the old KeyArena roof and still making money from the enterprise was so immense that Oak View Group and Seattle Partners weaved and wobbled under the strain.

Both came up with solutions quite different. It remains to be seen how each plays out.

Six weeks before Wednesday’s deadline to respond to Mayor Ed Murray’s request for proposals, OVG boss Tim Leiweke and his team were hit by sticker shock.

“The original design didn’t go far enough,” said Lance Lopes, the former Seahawks and Huskies executive now OVG’s director of special projects. OVG soon realized the only way to make the ice sheet work with sufficient seating was to dig down another 15 feet, which also created space for more loading bays, locker rooms and back-of-the-house needs, all below grade.

The price: An additional $200 million, making for a $564 million estimate.

Seattle Partners, the name for Anschutz Entertainment Group’s local enterprise, also discovered their costs were way beyond a $250 million target. Their response was to quietly slide in a request to the city of Seattle for $250 million in public bonding, to be paid back from building revenues. Total estimated cost: $520 million.

The idea was similar to Chris Hansen’s original plan in 2012 for up to $200 million in city bonds for his arena project in Sodo.

The business rationale was identical. Instead of asking for new tax money or redirecting current tax revenues, the developer seeks to use the municipality’s ability to borrow money much more cheaply than the rate for private borrowers from commercial lenders. Over a typical length of 30 years, the costs saved between, for example, four percent and eight percent interest, is many millions of dollars.

Hansen, partly in response to progressive Seattle’s demand for little or no funding for sports palaces, as well as the two KeyArena developers’ attempt at 100 percent private financing, withdrew his public bond request in a revised plan for Sodo that he submitted to the city for reconsideration three months ago.

But Seattle Partners went ahead and included the “suggestion” of public bonding as part of the funding package, which contradicts the condition set forth in the RFP.

Thursday, AEG president Bob Newman told the Seattle Times editorial board, a strong backer of a KeyArena solution over Hansen’s plan, that public bonding is “risk-free” and a “win-win” for all.

“This is an option that, if you do it this way, it creates better returns for the project as a whole,” he told the Times. “There is no wool over anyone’s eyes. This is a mechanism that truly will provide better returns to the city in addition to retaining ownership (by the city of the arena).”

That may be true, but it’s also $250 million that the city cannot use toward any other capital project. That borrowing capacity is a public asset whose use in the Hansen project was almost certain to draw litigation by opponents of public participation. And the request was sensitive enough that Seattle Partners was vague about the “suggestion” in the executive summary presented to the city.

Asked for a clarification, Partners spokesperson Aaron Pickus said three revenue streams would be dedicated to debt retirement and fully guaranteed — lease payments, ticket taxes and a facilities fee, but didn’t address why they didn’t explain the bond request.

“There is no risk to the city,” he said. “In addition, an independent financial analysis projects that there will be surplus from these revenues generated by the arena of $144 million over the course of the lease (35 years). That surplus goes straight to the city.”

In contrast to Seattle Partners choosing to save costs, OVG went the other way — increasing revenues. They made a deal with Live Nation,the events promotion company with a global reach. Lopes said the company, which owns Ticketmaster, took a small portion of equity in the arena and committed to making the Seattle venue “a top-10 destination arena” in their scheduling.

The income from more and better touring shows to the building, which is being planned as a concert facility first, without need of an anchor pro winter-sports tenant, is enough to cover the additional excavation expenses that make the renovated version about 660,000 square feet, nearly double the existing size and 60,000 more than the AEG plan.

The music-venue-first plan doesn’t sit very well with some NBA and NHL fans, who prefer Hansen’s plan of sports-first. The problem is revenues.

“The music business is very profitable,” Lopes said. His boss, Leiweke, was more direct.

“If we don’t have (Live Nation’s) partnership here and we’re not able to do 40-plus nights of music and we don’t have Pearl Jam . . . we couldn’t stand on our own two feet and take this risk,’’ Leiweke told the Times. “We’re going to build it, and we believe (teams) will come. And if they don’t come, we’re not going to get killed.’’

Friday, Irving Azoff, the entertainment mogul and part-owner of OVG, was even more blunt in a story in the Wall Street Journal.

“Music is a bigger league than any of the other (sports) leagues,” he told WSJ. His group’s renovation proposal “could turn KeyArena into one of the country’s top 10 moneymaking music venues, while doubling or tripling the size of Seattle’s touring market.”

Typically, revenues from games by pro sports tenants are not as lucrative, and they eat up dates from October to June, including reserving dates for playoffs that may not happen. Touring shows happen when they happen, and Seattle appearances have to book in conjunction with other West Coast sites, unless the tour starts here.

The sports calendar is part of the reason why Kansas City’s Sprint Center, an 18,000-seat arena opened by AEG in 2007 when Leiweke was running the show, is successful financially without an anchor tenant. Which is not to say that Kansas City wouldn’t welcome an NBA or NHL franchise, but neither league has expressed much interest in expanding, especially to a smaller market with an uneven record as a pro sports home.

Lopes emphasized that, given the sales of suites and expensive seating near the action, pro sports brings a constancy that the concert business can’t match.

“You’re still better off to have an anchor tenant,” he said. “The revenue streams and sponsorships are worth more with pro sports.”

Much remains to be learned about the proposals. But regarding the creation of a financially viable enterprise, OVG’s plan has an edge because it seeks no public help.

Newman of Seattle Partners said their project can do all-private funding too. But the fact that it opened the game with a public-funding “suggestion” that was a bit camouflaged likely will cause the select committee on the arena, which meets to consider the plans Monday, to have a collective arch in the eyebrows.

YourThoughts

ReebHerb

The KeyArena transformation into the Edward Murray Event Center will experience cost overruns. Git rid of the roof. Hide all of the HVAC on top of a new practical roof. Don’t try to fit in with EMP. Stipulate all caterers and servers be Sawant babes. Solve traffic and parking with really good TV angles. Forget about sports.

Note to Hansen: Seattle doesn’t like you. Git out of town. Move to Tukwila or Bellevue. Build a proper sports arena. Subcontract Joey’s to provide concessions and servers.

art thiel

I sense a theme here Reeb, about what draws you to events.

jafabian

If the NBA and NHL don’t want it then it’s wasted money. The Key can still serve as a music venue even without a major remodel.

art thiel

Most concert-goers and all the acts say Key’s acoustics are mediocre to poor, depending on location.

Regarding the leagues, I don’t think either company would have gone this far if they didn’t know the leagues trusted them to meet standards. For the building. Traffic/parking is another matter.

jafabian

Nothing can be done about traffic. They can’t put in more streets. The city of Seattleis becoming more and more like other large cities like San Francisco where they discourage people bringing their cars into the city. At best they could offer to build a large transit center near the arena.

Jamo57

Using public resources…….depending on a 50 year old transportation bottleneck…….waiting 30 years (which is looking more and more shaky in regards to timeline and funding) for additional mass transit capacity……adding additional entertainment dates to make it profitable which the neighbors will absolutely love dealing with……to provide a sports arena towards the bottom of league averages for capacity?

Sometimes the most obvious and easiest choice presents itself and should be taken.

Which of course the City of Seattle will probably ignore and build us a white elephant.

Here’s hoping the Lower Queen Anne NIMBYs are vocal and well organized.

art thiel

This is going to be a hard sell to LQA and others downtown, but nearly everyone who owns or rents around SeaCenter had to know what they were getting into by being close to a place that draws 10 million annual visitors.

It was pretty clear from the UpTown meeting in November that they were traveling down a path with the city that did not have pro sports teams and that scale of use over the past few years and this is an abrupt change to their draft neighborhood plan.

art thiel

By “they,” do you mean the bidders? If the bidders mis-stated their ambitions in the meetings, someone needs to call them out.

That was September, and my takeaway was apprehension and some opposition, but many seemed to be in wait-and-see mode. I don’t think there was much discussion of the impacts of the new tunnel and the three new east-west streets over the tunnel by 2020.

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Hey Buddy

I believe that Azzoffs line regarding concerts is the equivalent of the Aubrey McClendon “we didn’t buy the team to keep them in Seattle” interview. Both were the money bags behind the transactions revealing their true intentional.

I just can’t help but look at what happened in Kansas City and see the same thing happening. The same lines are being feed to the Seattle. It is just a better, essentially untapped, market so they are willing to put up more if there own money. I’m sure they will get a NHL team given the people associated with both groups but I am an NBA fan. I can’t imagine an NBA owner paying a huge expansion fee to be the second tenent in a city owned building with limited revenue streams.

I can’t blame the city for going with a plan that will pay to renovate their neglected property instead of selecting a plan that would do the opposite. I just wish they would stop marketing this as a “we are going to bring the Sonics back” project. They’re not because they simply don’t care enough to side with the local guy who genuinely wants to bring the NBA back. They ignored the emotions of the Sonics fans when they broke the lease to let the team go in order to pay off the debt. They are same thing this time around and I’m done with it.

They are going to construct what would be one of the smallest facilities in a city growing exponentially that is rated as having the worst traffic in the country.

I also want to point out the hypocrisy regarding the SCC decision about cutting ties with Wells Fargo over the Dakota Access Pipeline. If they choose OVG, Goldman Sachs will be providing the loan and they were also contributing funds to the NDPL buy why would the SCC care when they benefit from it?

art thiel

OVG wouldn’t go to the expense and trouble of digging down an extra 15 feet if they weren’t planning to fit an NHL sized ice sheet. So, yes, if its bid is accepted, the NHL is coming. The NBA? If it reaches a point where all teams are making money in their buildings/locations, there’s no relocation option. As as expansion, why slice the pie thinner with two teams?

While no municipality is oblivious to constiuents’ emotions, pro sports are a want, not a need. I get why a council has higher priorities than playpens, which is why the city has managed to get all-private offers. From a taxpayer standpoint, it should be seen as a triumph.

I think the fans and leagues will go to either location if the city could just bring themselves to make a decision (one they won’t flip flop on 4 years later).
The question is, why are we doing this, why are they, do those goals align?

Is AEG dumb to the business environment they have operated in with the city since the Sonics left, or are they a stalking horse, anyway.
Either way, they are in a hole, jumped or pushed regardless, there they are.

art thiel

AEG threw the bond option in the bid as a “suggestion,” and I’m certain it will get thrown back. I don’t know how they get private funding to replace the $250M they sought from the city, other than for Anschutz himself to dedicate his funds.

1coolguy

Neither concept solves the impossible: Traffic. SODO does, and extremely well.
In addition, since the Sonics days, which is BEFORE the remarkable residential construction in LQA, how are they going to ameliorate the local residents with this addition to activity in their hood? I can see the locals rising up vociferously, telling the mayor to go jump. An active, professional company that is operating a music venue will flood that neighborhood with congestion from many, many venue dates. Essentially every weekend will be booked and then weekday dates will infill. They will book over 100 music concerts per year right out of the box.
The solution to the Key is for the city to carve off that corner of the Center and SELL it to the highest bidder, resulting in at least three very good outcomes: The City will receive tens of millions for the property, it will be out of the continual, almost nomadic search for a suitor AND the city will no longer be caught up in the decades old effort to make the Key a profitable venture, which by definition, cannot occur as long a government is involved.

art thiel

I’ve suggested privatizing some of the Center grounds, which was done in 1958 when they deeded over the ground under what became the Space Needle. That one worked.

But opponents will say private business will create Vegas/LA Live/KC Power & Light, which most Center users will tell their council members, oh hell no. I get the point: What New Yorker would agree to sell off a quarter of Central Park to private money-makers?

Hey Buddy

I don’t appreciate people from the city going in front of the camera or calling the radio to say that we are going to bring the Sonics back. The spin that has been put on this situation is frustrating. The city basically held the SoDo project hostage until Key Arena was solved. It’s reality but it is just sick to see.

art thiel

If city officials took the legitimate reason of improving a city asset to quash the private option of Sodo and end the NBA’s chance at returning, I would agree. Evidence isn’t clear yet.

Ryan

Is there any chance of approving SoDo and the Key? Make one for sports and one for music?

Playhouse

The gentleman heading the project for the city, Brian Surratt, believes only one arena is viable in the market. Some on the council seem to be, at least, open to exploring the idea of two arenas if it makes sense. I’d say that crack in the door is very small, though.

art thiel

If he were to get the bid, Leiweke would be hyper-aggressive in getting nearly all the concert business to his joint.

art thiel

That thought is out there, but it’s hard to imagine Hansen making enough revs from non-sports events to make his building work financially, unless he is willing to personally underwrite annual operating losses.

woofer

The winner here would seem to be Hansen and Sodo. Renovation costs at the Key are coming in at about twice the level expected. In order to make it work financially one bidder needs $250 million in public bonding support and the second a major commitment to the music market. Both could be deal breakers.

Playhouse

That all depends on what the city wants out of it. If the city’s intention is focused on sports, that may be a deal breaker. If the intention is to replace an aging public asset with an arena that could potentially support sports as well, I would say they are getting what they want.

AEG’s “suggestion” (and overall seeming lack of effort) would appear to drop them to the bottom of the pile.

OVG’s proposal is aggressive and, though they haven’t completely closed the door on potential public contribution to operate or maintain the new arena, seems to take on the full financial risk to get the place built. Other than the sketchy and underthought responses to traffic and parking mitigation so far, OVG appears to have a solid offer that appeals to what the city asked for in the RFP.

Beckett Tallmadge

The city is not focused on sports….they have a long track record that says otherwise.

art thiel

Many would say that any municipality that focuses on sports is derelict in its civic responsibilities.

Beckett Tallmadge

Others might say that any municipality that rejects a half billion dollar investment is derelict in its civic responsibilities.

art thiel

The relatively short time between request and delivery makes these proposals more like range-finders than complete answers. Remember that the EIS on Hansen’s Sodo plan took 18 months to be comprehensive.

1coolguy

Hey, the Fool mayor and the Clowncil just dumped $2m on Pronto and over $100m on a 19th century, slow, traffic stopping trolley line, so don’t associate logic and rationale to these know-nothings.

art thiel

Don’t forget that the two bidders are advocating the Monorail.

1coolguy

Driving to the Key from Capitol Hill, it was faster and more convenient, even in 2007, to drive downtown, park at a meter and jump on the monorail. In terms of 18,000 fans though, the only answer is SODO.

Kirkland

Even if the funding issues damage the two Key Arena groups, Hansen still has to overcome opposition from the Port, Mariners and the Times’ editorial board. If those lobby groups successfully push back against SoDo like last May’s street vacation denial, we could end up with no arenas being built. Sports, music, business and politicos alike can’t accept that.

art thiel

Yes, that is possible. But if the Key remodels fail their exams, Hansen would have a stronger argument.

art thiel

The committee appointed to vet the proposals’ capacity to deliver will be asking such questions. It’s possible that the city would accept neither bid, and Sodo would be the fallback. But given that both proposals will improve a city-owned asset, where Sodo would virtually kill the Key’s future utility, wide latitude may be granted.

Tom G.

So basically in short, AEG is using the same financial plan that partially prompted this current Council to give Chris Hansen the middle finger while people linked to OVG are OPENLY acknowledging that in order to be profitable and get their money back from a $600 million upfront arena cost, that music must drive the bus instead of sports.

And meanwhile, here are Sonics fans (and to a lesser extent, NHL fans) stuck in the middle with SEATTLE GOVERNMENT while you have clowns to the left and jokers to the right.

I’m gonna need a barf bag.

art thiel

Actually, the council never acted on the public participation aspect, only the street vacation vote. The blowback was from tax watchdog groups who made clear to Hansen’s team their intent to litigate after any council action to advance the Sodo project.

And yes, AEG is in the the music business, which is virtually a guaranteed rev stream from the start, whereas pro sports is dependent on the whims of monopoly operators.

Tom G.

Still feels like some bait-and-switch is happening if the City keeps saying “this arena plan will bring the Sonics back” while you have Irving Azoff of Oak View basically admit quite candidly in the Wall Street Journal that Pearl Jam and music are going to drive the bus at their version of KeyArena and “music leagues are a much bigger league than sports leagues” are.

Chris Hansen may not be close to perfect, but I highly doubt you’d hear him say anything close to THAT.

art thiel

Fair point about the bait-and-switch. But keep in mind that neither sports commissioner nor the long-time owners trust Seattle’s liberal process that wants to deny pro sports access to public money. Seattle’s council and mayor in 08 told the NBA to drop dead, so its team was taken away.

The two bidders know the leagues’ skepticism about Seattle, so they designed a workaround that calls for construction on spec, funded by music revs. You may disagree with their priorities, but it’s their money at risk, not yours.

Tom G.

I get that.

But at the same time, I want the Sonics back (and the NHL here) and I think a lot of people in this region feel the same way.

So if the business model of an on-spec arena doesn’t really roll out the welcome mat for teams to EVENTUALLY come because having more concert dates is what’s going to make AEG/OVG legit money, then it’s an arena that isn’t really beneficial for the community.

art thiel

As Lopes said, in the long run, the steady revs from 5- and 10-year deals on suites and season tickets for pro teams is valuable too. The biggest question is whether the owner of a sports team believes there’s enough money to be made when the building and grounds are owned by the city and the arena is operated by a third party.

Tom G.

And I’d put the odds of the pro sports owner believing there’s enough money to go around at “little to none” in that scenario you just laid out because inevitably the 3rd party operator, along with the City, is going to want too much money and/or power over the arena and it won’t end well.

We need more info. Evaluating suggestions from an executive summary and random press reports is a little frustrating.

art thiel

Everything will be online shortly.

Rj Smith

So Hanson only wants to build in Seattle? No Bellevue? Don’t laugh…. why doesn’t Tacoma ever get a consideration from anybody? If the Santa Clara 49ers can build a 70,000 seat football stadium an hour from SF, why can’t an NBA arena be built in Tacoma? I understand the trip from Seattle to Tacoma on weeknites is probably a nightmare, but it’s the same for fans going the other way. Would you rather have the Tacoma Sonics over no Sonics? Dont tell me Tacoma isnt large enough, Orlando is roughly the same size as Tacoma, does not have a larger neighbor like Seattle 30 miles away & just built a new arena. Salt Lake City supports the Jazz & that market is super small. Keep in mind I live two time zones over, so I’m slowly beginning to understand the idiotic politics of Seattle. I could just never figure out why Tacoma has never been given either a serious look or just used as leverage.

art thiel

Hansen already spent $125M to be on the edge of downtown Seattle. No one in this time zone who travels I-5 between the cities would even dream of suggesting such nonsense.

Kirkland

Tacoma doesn’t have the number of corporations and companies needed for sponsorship and season tickets, a huge consideration. For baseball and the winter sports, corporate sales make up the bulk of season tickets.

Jim LS

Santa Clara is at the heart of the money center of the Bay Area. It is also a great central point between the wealthy in SF and the wealthy of the East Bay (of which there are many – see Blackhawk). Tacoma is at the lower fringe of the Seattle Metro population center. The drive to Tacoma would chase many, like myself, away.

Effzee

Am I reading this right? Pearl Jam would go from fighting The Man (Ticketmaster) to partnering with them? And the city would go from being offended by and abjectly rejecting Chris Hansen’s public funds request to accepting the same thing from another party? Seems about right, for Seattle.

art thiel

My impression was PJ was looking at it, not committing to it yet. And I suspect that if they kept to their opposition, Ticketmaster might have to be excluded form their concerts.

The city hasn’t made a decision, nor has Seattle Partners insisted on asking for bond support. They call it a “suggestion.” I’m thinking of “suggesting” Bill Gates give me $1 million.

JB

Great article Art. There are no guarantees of a sports team and therefore the bidders need to justify how they can do this without a sports team. The leagues want to see an arena to issue a team, now fans (other media) jump on AEG/OVG for showing that it can work without a anchor sports tenant. Seems like a circular argument.

I also disagree with the public financing aversion of the city. We had a signed MOU with the financing in SODO approved. Bagshaw has also said that she is not opposed to pubic contributions to projects. To your point, I am sure the public financing components will get challenged in court but that didn’t stop the city council approving it the SoDo MOU.

Jim LS

Being a hockey fan and not caring for the NBA at all, seems like OVG is the one to root for over the other two. Any chance Sodo and the Key get done? …. and if Hansen’s primary drive is to own an NBA team in Seattle, wouldn’t it be far cheaper to partner with whichever group wins the key remodel rather than building his own house?

Will Ht

People are naturally resistant to change, and new things can be tough to swallow, but disruption allows for healthy evolution and growth. No one wants to get taxed again to fund these billionaire team owners, and no one wants these vital economic benefits to get shipped out to some company in Los Angeles.

Seems to me, the best solution would be a Reg. A+ IPO that lets the fans in on the profits. This antiquated public funding is a cancer on our cities, and we don’t have to let it spread. A viable solution would be a trust like MyArenaFund that gives everyday people the opportunity to invest and become shareholders in our community venues. That way, we don’t have to settle for $200 million+ in taxpayer dollars, and instead, fans and locals can become part-owners, score dividends, and share in the success of KeyArena.

Maybe not the most traditional approach, but it sure seems like the 99% would be better off keeping the stadium out of this town’s billionaire boy’s club.

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